Suppose a firm makes purchases of $3.6 million per year under terms of 2/10, net 30 and

Question:

Suppose a firm makes purchases of $3.6 million per year under terms of 2/10, net 30 and takes discounts.
a. What is the average amount of accounts payable net of discounts? (Assume that the $3.6 million of purchases is net of discounts—that is, gross purchases are $3,673,469 and discounts are $73,469. Also, use 360 days in a year.)
b. Is there a cost of the trade credit the firm uses?
c. If the firm did not take discounts and it paid on time, what would be its average payables and the APR and r_EAR of this nonfree trade credit Assume the firm records accounts payable net of discounts.
d. What would be the APR and r_EAR of not taking discounts if the firm can stretch its payments to 40 days?

Accounts Payable
Accounts payable (AP) are bills to be paid as part of the normal course of business.This is a standard accounting term, one of the most common liabilities, which normally appears in the balance sheet listing of liabilities. Businesses receive...